Title: China’s Bank of China Records a Drastic Drop in Loans, Heightening Deflation Concerns
Date: August 14, 2023
Newly released data from the People’s Bank of China indicates a significant decline in new bank lending in July, raising concerns about deflation risks and the economic downturn. Despite recent efforts by the central bank to lower interest rates and the government’s promise to provide further support to the sluggish economy, experts suggest that these measures have failed to reverse the downward trend.
The Bank of China’s new loans in July amounted to 345.9 billion yuan, experiencing a staggering 89% drop from June. This figure fell well below analysts’ expectations and was significantly lower than the 679 billion yuan recorded in July 2022, marking the lowest new loan volume since November 2009.
While it is typical for loans in China to decrease in July due to seasonality, other economic data released in the same period revealed that the world‘s second-largest economy slipped into deflation. Imports and exports also experienced sharp declines, putting pressure on Beijing authorities to implement more robust stimulus measures.
Additionally, data from the People’s Bank of China indicated that RMB loans increased by 345.9 billion yuan in July, and the social financing scale grew by 528.2 billion yuan. However, all major credit indicators, including new loans and the increase in social financing, plummeted significantly. This decline raises further concerns about the weak economic recovery in the third quarter.
To stimulate consumption and investment, the central bank decided to cut interest rates. However, experts argue that unless there is a broader improvement in business and household sentiment, credit growth may not improve significantly. While the benchmark lending rate was reduced by 10 basis points in June, with the possibility of more rate cuts on the horizon, cautious borrowers and businesses may limit the impact of such measures.
Although China’s banking industry has observed a rise in loan issuance during the first half of this year, it has not been successful in reversing the economic downturn. Household loans, primarily mortgages, declined sharply in July to 200.7 billion yuan from 963.9 billion yuan in June. Corporate loans also experienced a substantial drop, falling to 237.8 billion yuan from 2.28 trillion yuan in June.
Analysts from Capital Economics attribute the weakening credit growth to weak credit demand, emphasizing the need for greater interest rate cuts and the restoration of confidence in the real estate market to revive demand effectively. The recent Politburo meeting in July addressed these concerns, proposing an increase in macro-policy regulation intensity, focusing on domestic demand expansion, confidence boosting, and risk prevention. However, the lack of concrete measures since then has left investors disappointed.
China now faces the challenge of addressing deflation risks and rejuvenating its economy as it grapples with diminishing credit growth. The combination of declining new bank loans, increased pressure for powerful stimulus measures, and dwindling imports and exports raises questions about the effectiveness of current policies in stabilizing the economy.
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